YOUR PROPERTY AND THE CHAPTER 7 BANKRUPTCY ESTATE
When you file a petition for bankruptcy, either Chapter 7 or Chapter 13, all property you own or partially own, no matter where it is located or whether it has any real fair-market value, becomes an “asset” of a legal “bankruptcy estate.”
In a Chapter 13 bankruptcy, in which no assets are liquidated by the bankruptcy court, you remain in control of the assets of the bankruptcy estate (your stuff) unless your particular Chapter 13 plan contains in a provision stating otherwise.
In a Chapter 7 “liquidation” bankruptcy, the bankruptcy estate is administered by an individual called the Chapter 7 Trustee, who is assigned to your case by the bankruptcy court when you file it.
The Chapter 7 Trustee’s job is to liquidate the assets of the estate for the benefit of your creditors, who are otherwise, unlike in a Chapter 13 bankruptcy in which you do repay some of what you owe through a 3-5 year payment plan, to receive nothing toward the debt that you owe.
In other words, the Chapter 7 Trustee can take your stuff, sell it off, and give the resulting proceeds to your creditors.
However, in the vast majority of Chapter 7 cases, no one loses anything because the Bankruptcy Code (the Federal law governing the bankruptcy process in the United States) provides some protection for your property by way of provisions called “exemptions.”
The exemptions provide that certain types of property up to certain dollar-value limits may be “exempted” (removed) from the bankruptcy estate. If an item of property is exempted up to its full fair-market value, it is totally protected and may not be seized and liquidated by the Chapter 7 Trustee.
Until a certain point in the bankruptcy process, the Chapter 7 Trustee retains the power to object to exemptions that are applied if he or she believes that the type of property is not the sort of thing the objection was intended to protect or if he or she believes that the value of the property is more than is stated on the bankruptcy petition schedules.
If the Trustee has no interest in doing so, however, the property will be abandoned by the Trustee. The question here is, “When does that actually happen?”
PROPTERY ABANDONMENT BY CHAPTER 7 TRUSTEES
Property is “abandoned” by the Chapter 7 only formally in 1 of 2 ways:
- By way of an order from the court compelling the Trustee’s abandonment;
- Or when the Chapter 7 case is closed by the court after the Trustee files a Report of No Distribution.
A motion requesting the court enter an order compelling the Trustee’s abandonment may be filed by you with your attorney under certain circumstances, some material or legal, some merely tactical, to force a Trustee into a timeline for negotiation and (hopefully) resolution of the issue.
If the motion is granted, the Trustee has been ordered by the court to abandon interest in liquidating the property, and you can feel secure that it will not be liquidated in your Chapter 7 bankruptcy.
Such a motion will nearly always result in negotiation or litigation with the Trustee, for which most debtors’ attorneys will charge additional fees on top of the fee you paid for the Chapter 7 bankruptcy itself.
In addition, the motion carries a filing fee which must be paid to the court upon filing. Otherwise, assets are formally abandoned after you receive your discharge and the Bankruptcy Court closes your case.
If the Trustee initially, after your 341 Meeting of Creditors, does not have any interest in liquidating any of your property, he or she may file a document called a “Report of No Distribution” with the Court. This “report” alerts the court that he or she does not believe that you have any non-exempted property to be liquidated and that he or she would like to be relieved of further duties in your case.
It is always a good sign to see the filing of a Trustee’s Report of No Distribution—but it is not formal abandonment.
The Chapter 7 Trustee can revoke these reports at any time, should he or she come upon new information related to your assets or the concealment or true value of an asset, or if new property enters the bankruptcy estate after the report is issued (such as an inheritance received after the report’s filing but within 180 days of the filing of the Chapter 7 case), or in other circumstances.
CHAPTER 7 TRUSTEE ABANDONMENT: THE BOTTOM LINE
The bottom line with regarding to Chapter 7 Trustee abandonment of your property is that you will need an experienced bankruptcy attorney to, first, properly apply either the Michigan or Federal exemption scheme to your particular property and, second, to then deal with the Chapter 7 Trustee afterward if everything that you own cannot be fully exempted.
“Going it alone” without a lawyer assisting you, or using a non-attorney “bankruptcy petition preparer” may seem like a good way to save a few bucks up-front with your bankruptcy—but it is also a great way to lose important assets later on when you find out that you really don’t know what you’re doing.
Properly drafting, filing, and arguing a Motion to Compel Abandonment, not to mention understanding when such a motion should be filed, simply requires an experienced bankruptcy attorney, period.
Attorney Walter Metzen has guided thousands of clients through the Chapter 7 and Chapter 13 bankruptcy process for over 30 years.
A Board-Certified bankruptcy expert, Attorney Metzen will ensure that you are well-informed and well-represented when dealing with your Chapter 7 bankruptcy Trustee.